Active management

Whether it’s nuclear tensions on the Korean peninsula, revolution in the Ukraine, the Brexit vote in the U.K. or an unpredictable legislative agenda from the Trump administration, there is no shortage of geopolitical issues for investors to consider. However, for us as long-term investors, the question is: When do these stresses create buying opportunities?

For the past couple of years, I’ve been seeing the same headlines over and over, predicting the end of brick and mortar retail. The rationale is that Amazon will continue to expand its offering lineup and wipe out entire sectors shortly after it enters their space.

As you may well know by now, Trimark portfolio managers are not macro investors. We don’t spend our time formulating top-down macro views. Instead, we research individual companies to find those that we believe offer the best return potential.

Market expectations of inflation have risen in recent days, after signs of wage growth – often seen as a harbinger of inflation – appeared in the January jobs report. We at Invesco Fixed Income believe investor concerns that inflation is finally showing signs of life have helped drive interest rates higher and impacted credit markets, where worries over higher interest rates (and their potential impact on companies) have caused declines in stock markets and other risky assets.1

In my recent blog on the impact of the tax reform, I explained why I believe the new tax law should be extremely supportive of the U.S. investment grade (IG) bond market, including provisions that could lead to reduced supply. Looking beyond IG, the news appears to look good for other fixed income sectors as well.

2017 marked only the second time in the last eight years that international markets outperformed the U.S., with the MSCI All Country World Index (ACWI) ex-U.S. returning 27.19%, and the S&P 500 Index returning 21.83%.1 So is this the beginning of a sustained shift in outperformance? On one hand, there is a list of risks facing international markets, from Brexit to a potential slowdown in China. But on the other hand, international companies have recently been trading at a substantial valuation discount compared with the U.S., and we have been seeing strong profit expansion.

In many ways, 2017 was an exceptional year. The U.S. equity market did better than most expected, despite concerns about the new President and worries about the economy, valuations, Brexit, North Korea and the Middle East.

This time last year, the Invesco International and Global Growth team was optimistic about the better relative earnings potential that we saw building in Europe. Indeed, the trends played out to our benefit over the course of 2017.

Despite the near non-stop drama of the legislative process, we ended December with the U.S. Tax Cut and Jobs Act of 2017 being signed into law. What does this mean for fixed income investors? In my opinion, the news is overwhelmingly positive for the U.S. investment grade market; here are four reasons why.

Despite what has been an incredibly tumultuous, unpredictable and at times unimaginable period for global politics and an initially spluttering return to global growth, central banks appear to have successfully steered markets through the worst, ironing out the kinks and at times acting together to present a semblance of global harmony. Sometimes, markets have appeared to simply ignore events that in less interesting times would have caused a rout. Somehow though, it still doesn’t feel that the aftermath of the financial crisis is fully behind us, nearly 10 years on, and we believe it is vital to consider both cyclical and structural forces in building our economic and market outlook.

Europe is a rich, highly developed part of the world which is home to a vast range of companies. However, on occasion it still seems to struggle to attract attention from serious investors around the world. There’s always a handy excuse: “Why bother when it’s only a play on more interesting parts of the world?” or “There’s never any earnings growth, is there?” or “Don’t the politics make it un-investable?” Wrong.

Chinese equities caught investors by surprise in 2017 with a strong rally. Contrary to the pessimism over the past few years, investors have turned upbeat towards China, and for good reason: Economic data in general exceeded expectations, and we have seen broad-based earnings growth.

Forecasting is notoriously difficult, and unexpected events can derail even the best educated estimates. Five of Invesco’s global CIOs discuss the most likely risks facing their base-case expectations for market performance in 2018.

The current market rally is one of the longest in history, and valuations in many markets may be stretched. Five of Invesco’s global CIOs explain their views on valuations and which markets might provide opportunities in 2018.

Company information

The information provided is general in nature and may not be relied upon nor considered to be the rendering of tax, legal, accounting or professional advice. Readers should consult with their own accountants, lawyers and/or other professionals for advice on their specific circumstances before taking any action. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed.

Commissions, management fees and expenses may all be associated with investments in mutual funds and exchange-traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. For mutual funds the indicated rates of return are the historical annual compounded total returns, including changes in share/unit value and reinvestment of all distributions, and do not take into account sales, redemption, distribution or optional charges, or income taxes payable by any investor, which would have reduced returns. For ETFs unless otherwise indicated, rates of return for periods greater than one year are historical annual compound total returns including changes in unit value and reinvestment of all distributions, and do not take into account any brokerage commissions or income taxes payable by any unitholder that would have reduced returns. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. There are risks involved with investing in ETFs and mutual funds. Please read the prospectus before investing. Copies are available from Invesco Canada Ltd. at invesco.ca

These are the personal views of the author as at the date indicated, and not necessarily the views of Invesco Canada. The views expressed above are based on current market conditions and are subject to change without notice; they are not intended to convey specific investment advice. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions considered to be reasonable, there can be no assurance that actual results will not differ materially from such expectations.

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Most PowerShares ETFs seek to replicate, before fees and expenses, the performance of the applicable Index, and are not actively managed. This means that the Sub-advisor will not attempt to take defensive positions in declining markets and the ETF will continue to provide exposure to each of the securities in the Index regardless of whether the financial condition of one or more issuers of securities in the Index deteriorates. In contrast, if a PowerShares ETF is actively managed, then the Sub-advisor has discretion to adjust that PowerShares ETF’s holdings in accordance with the ETF’s investment objectives and strategies.

Invesco Intactive Accumulation Portfolios are Invesco Canada mutual funds that invest in a portfolio of underlying Invesco Canada mutual funds and exchange-traded funds. Tactical asset allocation strategies are used on a portion of the Invesco Intactive Accumulation Portfolios. The corporate class versions of the Invesco Intactive Accumulation Portfolios invest in Series I units of these Portfolios.